Change Starts at the Top: Imperative to Bring Biotech Voices to Pharma Boardrooms

Most of Big Pharma have been trying to reinvent themselves as nimble Biotechs, at least in the eyes of Wall Street, in order to be perceived as being innovative R&D-driven companies. Despite the restructurings, Big Pharma is struggling with that transition. Since corporate change has to start from the top, a lack of biotech-savvy corporate governance may be at the heart of the issue: the reality is there are few if any biotech voices in Big Pharma boardrooms.

According to data from CapIQ this spring, twelve of the largest Big Pharma companies have a combined 182 Directors. Less than 2% (3) of these are former Biotech senior executives, and two of those (Art Levinson and Dale Edgar) are there from acquisitions of Genentech by Roche, and Hypnion by Lilly. The third is Vicki Sato, who serves on the BMS Board, and was formerly of Vertex and Biogen.

Here’s the pie chart that captures the breakdown:

To have less than 2% of the voices in the board room from biotech while trying to become more biotech-like seems like an absurdity, especially when there are a large number of seasoned (and often retired) executives from biotech available with experiences at Genentech, Gilead, Genetics Institute, Immunex, Centocor, and certainly an even longer list of venture-backed biotechs. Board members with intimate knowledge of ongoing experiments like asset-centric project financing and virtual discovery and development models would bring a new perspective into the strategic dialogue.

To be fair, about half of the Scientists & Academics on their boards have had exposure to biotech as either scientific founders, advisory board members, or as formal board directors. Even being generous, that still means that less than 10% of their Board Directors have any real biotech experience or exposure. Importantly, while these distinguished academics certainly bring great backgrounds, advisory or founding science roles aren’t executive decision-making positions so lack some of the experiential perspective of a Levinson or Sato.

The majority of the Directors in these 12 Big Pharma companies are industry executives from other sectors, like banking, insurance, manufacturing, services, consumer products, and retail. Most if not all of them are accomplished, seasoned leaders in their fields, and presumably know a lot of running businesses. But the drug business is truly a special one. The difference between most sectors and the pharmaceutical industry couldn’t be more profound: major R&D productivity issues exacerbated by incredibly long R&D timelines and extensive upfront investments, significant regulatory risks both in R&D and post-approval, unparalleled scientific and clinical risks, complex healthcare payor, pricing, and reimbursement systems (where the consumer, prescriber/decider, and payor are separated), reliance on the international patent system for protection from competition, etc… This combination is unlike any other sector.

I’m not claiming that current or former biotech executives are experts on all these subjects, but certainly their familiarity with the details and decision-making around the nuance and complexity of these issues would be of great benefit during strategic dialogues in the Pharma board room. And their mere presence on more boards would help subtly shift the culture of the boardroom.

A Board is supposed to provide objective oversight of the business on behalf of the shareholders, and so different perspectives and skills (especially for audit committee work) are important, but the case for a major restructuring of the Pharma Boardroom couldn’t be stronger given these data and the challenges Pharma faces today. Shareholders of these big firms should be demanding it, and activist investors should be pushing for it.

Here’s the snapshot on a company by company basis according to our analysis of biography data from CapIQ:

To give credit where its due, this theme of inadequate corporate governance caused by the skewed composition of Big Pharma Boardrooms has been a common refrain from Stelios Papadopoulos. I heard him mention it several years ago, and then again at the recent Biotechnologia meeting in Greece. I finally got around to looking at the data myself and he couldn’t be more right.

The strategic push to become more biotech-like is an industry-wide phenomenon, and the corporate boards of these companies need to change as they aspire to change their corporate cultures.

So can we conclude that big pharma oversight is provided by Wall St representatives, and not drug product developers? How is this different for listed bio biotech companies? My sense is that the dataset is skewed because it’s focused on public/listed companies. Regardless, I agree that a shift in governance is needed to better reflect the realities and nuances in our industry.

Anonymous

Sorry, I think this is a crazy idea. It should be the other way round – we need more pharma voices in biotech boardrooms. Biotech boards are full of folks who have either never run a business, or never gotten a real drug to them market.

Talking about R&D productivity, or lack thereof, can you share stats which indicate that “biotechs” have a higher R&D productivity than Pharma?

Anonymous

I certainly believe its good to have Pharma veterans on biotech boards – all or most of our biotech portfolio companies have former pharma exec’s involved. They are great at adding drug development input in particular. But to say that the inverse isn’t a good idea seems absurd.

Interestingly enough, “Former Pharma” execs on other Pharma companies boards are just as rare as Former Biotech exec’s (see pie chart above). Its sad, actually.

Whether or not biotech R&D productivity is better or worse (I’ve seen conflicting data), the perception is certainly there and the push inside of Pharma to be more biotech-like is universal. Further, the cultural piece of being biotech-like is clearly being sought after: smaller groups, nimble decision-making, more accountability, less committees and bureaucracy, more creative development, strategic outsourcing, etc…

Anonymous

Bruce – thanks. In reflection I did realize that my previous post made it sound like I completely disagreed with your hypothesis / assertion – i.e. there being a need for pharma boards to have more biotech executives. Biotechs and Pharmas both need to have a synergistic relationship and I agree that the boards of each entity should be reflective of that need.

I do have a follow up – when thinking of “biotech folks” that you feel pharmas would benefit from having on their Board…what kind of a person are you thinking of? A susperstar operator / company builder? A star CMO? A star CSO? In other words if you were a Pharma CEO…what kind of a person would you be scouring the biotech landscape for to have on your Board?

I think there are several phenotypes of ‘biotech folks’ that could be valuable voices in Pharma boards. The most obvious type would be successful C-level executives (CEO, CMO, CSO, etc…) of the mid-cap or large-cap Biotechs (Genentech, Gilead, Vertex, Biogen, Genzyme, Shire, etc…). Another set would be successful, serial venture-backed entrepreneur who has helped drive value creation in smaller biotechs. A third group would be experienced biotech investors who helped fund and build biotechs over the past 30 years (btw, Tech VCs are on the boards of many large public Tech companies). All would provide different perspectives for a Pharma CEO and more generally for Pharma boards.

MBM

I’d be curious about your thinking regarding John Carroll’s contrarian tweet : http://tinyurl.com/3otbyj2
Do you know of instances of an active/influential board culture that truly shaped the direction of any one pharma?

CMCguy7

The biggest differences between Pharmas and Biotechs are “cultural” (that you well touch on in response) with inherent attitudes and approaches that occasionally overlap but the settings can be like oil and water (so takes vigorous mixing to form a temporary emulsion) so providing an alternate perspective probably sounds nicer than any real influence that can be generated. True vibrant cultures are sought after because most Big Pharma have stifled or killed internal efforts through mismanagement in last few decades. Assuming R&D still an important component then adding Biotechers to the BODs will unlikely have much positive value for changes, particularly when looking at the data where only 1/12 has >50% not “Other”, unless coupled with more drastic redistribution where seems that overall relevant industry and/or Science is grossly underrepresented to recognize what good Pharma leadership should be. Although realize smart people from other fields can learn and adapt their knowledge beyond their areas of expertise you well point out “drug business is truly a special one” so in-depth understanding that is vital may be not so much an issue at the BOD level as it is at the Executive levels in many of these companies currently.

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entropyGain

More biotech experience would certainly help, but isn’t the bigger problem the balance of power between the lawyers/financiers on the one hand and the scientists/MD’s on the other? The boards response to the combined pressures of playing legal defence and quarterly earnings seem to be the root of much of the dysfunction.